Startup investment scene on the cusp of seachange

The world of investment in startups is changing, and what’s happening in the rest of the world will soon be occurring down under.

Part of the change comes about because one of the little uncool secrets of the venture capital world, is, generally speaking, it ain’t doing that well from a returns point of view.

And it is not only in New Zealand that VC funds are finding it tricky to attract new capital. Around the globe, more than 1700 VC firms are looking for more cash.

Vinod Khosla. Photo / Wikimedia

The biggest and best known VC firms such as Khosla Ventures (investor in LanzaTech) and others are getting bigger. These super VCs are managing to provide a decent return mainly by virtue of the fact that they get first pick – they’re the best known, so people go to them early on; and many of the ideas will be crackers.

But back in the US, it is estimated that half of the institutional investors who invest in VCs are going to refuse to put in anymore promised monies (they don’t put in all the money upfront, instead drip feeding it in). These limited partners are effectively saying to the VC, ‘sue me’, banking that they won’t.

Here in New Zealand, we’re not immune to under-performing, or even completely unperforming VC companies. Apparently the Number 8 Ventures Number One fund made absolutely no money for its investors. The Number 8 Ventures Number Two fund got off the ground before Number One reported back its performance.

This isn’t a surprising way of doing things; indeed similar things happen in the US as Hatm Tyabil and Vijay Sathe provide in a great overview ‘Venture Capital Firms in America: Their Caste System and other Secrets’ here.

The NZ Venture Investment Fund and associated VC partners have been pleading for more time (than the originally estimated seven years) to obtain a return from the fledgling companies they invested in. NZVIF and its VC partners have just started to exit some of their investments, including HaloIPT – the first of what must be hoped is a number of divestments.

All of which is a roundabout way of pointing out a fascinating article by Pascal-Emmanuel Gobry at Businessinsider.com, ‘The Way Companies are Getting Financed is Completely Changing'.

Gorby argues that though the VC market is moribund, there are many new financing options for growing companies that weren’t available a year ago.

These include:
- Crowdfunding
- Accelerators
- Super-angels
- Late-stage private equity
- The long-delayed IPO

There isn’t yet a local crowdfunding play, but there doesn’t have to be. A newly hatching startup can hang their shingle, put their pitch on sites such as AngelList.com or Kickstarter.com (similar but for ‘creatives’) and see if they garner enough collective money to allow them to get going.

The Securities Market Conduct Bill might manage to get through Parliament in the first quarter of next year, and this contains provisions for peer to peer lending (for smaller amounts that doesn’t require the person receiving the money to issue a prospectus) which will legally allow crowdfunding type setups in New Zealand.

Who fills this Kiwi-centric void will be a fascinating space to watch next year.

Accelerators are a more advanced, more IT-centric form of our incubators. The incubators are doing a reasonable job in New Zealand, and MED can't kill them).

The angel investment scene has been an expanding bright spot – with November’s Angels Summit in Tauranga deliberately coinciding with the announcement of a new ‘Enterprise Angels’ body centred on the Bay of Plenty. It initially has $4 million in its investment pot.

New Zealand’s angels are filling some of the gap currently left by VCs, as most are fully subscribed by their investment companies. An exception is the Movac #3 fund which is now looking for investment opportunities.

It is the later, slightly more mature startups that find it difficult to expand in New Zealand.

These slightly larger companies are still too small for private equity companies to buy out, while a stockmarket listing is usually deemed too expensive and/or comes with too many reporting obligations.

This is part of the NZ conundrum, the ‘Valley of Death’ funding gap. It’s the $2 million to $10 million next capital injection required by growing companies, expanding their footprint across the rest of the world.

All and all, this means the next period of startups and commercialisation and investment is promising to be very interesting.

The development of new funding options will coincide with the launch of the Science and Innovation Council (to be chaired by a senior cabinet minister, we're tipping John Key).

It’s all part of a stirring of the innovation pot – actually turning a good idea into something that makes money.

The more this happens, the more it will happen. It’s a virtuous spiral that can only be good for all of us.

This post originally appeared on Sciblogs.